Case 20.

3
DINDA TRIA LESTARI I KEMALA PUTRI AYUNDA I TATIK FRAGMA CITRA
IINTERNATIONAL ACCOUNTING 2015

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 IAS 23
Borrowing cost

IAS 8
Accounting IAS 37
Procision, contingent Llability and contingent assets
policies,
changes in IAS 11
accounting Construction contracts

estimetes
and errors IAS 18
Revenue

IAS 1
Presentation of Financial Statement
 Case 20.3
Gear Software, a public limited company, develops and sells computer games software. The revenue of Gear Software for the year ended 31 May 2003 is
$5 million, the balance sheet total is $4 million and it has 40 employees. There are several elements in the financial statements for the year ended 31 May
2003 on which the directors of Gear require advice.
Gear has two cost centres relating to the development and sale of the computer games. The indirect overhead costs attributable to the two cost centres
were allocated in the year to 31 May 2002 in the ratio 60:40 respectively.
Also in that financial year, the direct labour costs and attributable overhead costs incurred on the development of original games software were carried for
ward as work-in-progress and included with the balance sheet total for inventory of computer games.
Inventory of computer games includes directly attributable overheads. In the year to 31 May 2003, Gear has allocated indirect overhead costs in the ratio
50:50 to the two cost centres and has written the direct labour and overhead costs incurred on the development of the games off to the income statement.
Gear has stated that it cannot quantify the effect of this write off on the current year‘s income statement. Further, it proposes to show the overhead costs re
lating to the sale of computer games within distribution costs. In prior years these costs were shown in cost of sales.

Two Centres Two Centres

60 40 50 50
Development Sales Development Sales

Labor Cost OH Cost Labor Cost OH Cost

31 May 2002 31 May 2003

Work in Process Income Statement

Total Inventory Can’t quantify wirte off effect

(Balance Sheet) Before Current

Cost of Sales Distribution Cost

 IAS 8
Accounting policies,changes in accounting estimetes and errors

“ It is necessary to distinguish change in accounting policy and c

hange in accounting estimates. A change to an accounting inv
olves a change in the way in which an item is recognized, mea
sured or presented. “

Gear Software Game

 Case
The indirect overhead cost are directly attributable to the
two cost centres and are included in the inventory valuatio
n in the statement of financial position
Direct labor and overhead cost were previously carried forwar
d as work in progress and include in the statement of financi
al position as part of inventories. They are now written off to t
he income statement as they are incurred.
Overhead cost relating to the sale of computer games were
previously included in cost of sales and are now included in
distribution cost.
Analysis
The only change has been a change to the way in which t
he costs are allocated. There have been no changes to th
e way in which they are recognized, measured or prese
nted. This change is not a change in accounting policy, b
ut a change in accounting estimates.
There has been a change in the way in which these cost a
re recognized and presented and therefore there is a cha
nge in accounting policy.
There has been a change in the way in which these
cost are presented and again, there has been a chan
ge in accounting policy.
Continuing Case
In prior years, Gear has charged interest incurred on the constr
uction of computer hardware as part of cost of sales. It now pro
poses to :
 Capitalise such interest and to
 Change the method of depreciation from the straight-line met
hod over four years to the reducing balance method at 30% per
year.
 Depreciation will now be charged as cost of sales rather than
administrative expenses as in previous years.
 Recognises revenue on contracts in proportion to the progre
ssion and activity on the contract. The normal accounting pra
ctice within the industrial sector is to recognise revenue whe
n the product is shipped to customers.
 Change in accounting policy to bring the company in line wit
h accounting practice in the industrial sector would be to increas
e revenue for the year by $500,000.
 Cosntruction Interest Cost of
of computer sales
hardware incurred

Company purposes some mechanism

Capitalize Recognise
Analysis Illustation interest
Change depreciation
method Depreciation
Revenue
of case

Before: After: Before: After:

Reducing progression and when the
Straight line 4 balance product is shipped
activity on the
years method 30%/years contract to customers

Accepted indust
ry practices

Revenue $ 500,000
 Accounting Policies
Selection and application
Results in the financial
statements providing reliable
is required by a standard or
and more relevant
interpretation
information
When a Standard or an
In the absence of a Standard or an
Interpretation specifically applies to
Interpretation that specifically
a transaction, other event or
applies to a transaction, other
condition, the accounting policy or
event or condition, management
policies applied to that item must
must use its judgement in
be determined by applying the
developing and applying an
Standard or Interpretation and
accounting policy that results in
considering any relevant
information that is relevant and
Implementation Guidance issued
reliable. [IAS 8.10].
by the IASB for the Standard or
Interpretation. [IAS 8.7]
 IAS 8
Accouting treatment

Accounting policies
• Principles/
measurement basis,
convention, rules
• restropectively

Accounting estimates
• Adjusment of carrying
amount of an asset or
liability
• prospectively

Errors
• Omission or
misstament in financial
statements
• restropectively.
 In prior years, Gear has charged interest incurred on the construct
ion of computer hardware as part of cost of sales. It now proposes
to
 Capitalize such interest and to
 Change the method of depreciation from the straight-line method
 Depreciation will now be charged as cost of sales rather than
administrative expenses as in previous years.

Analysis IAS 23 borrowing costs now requires the capitalization of inte

rest relating to qualifying non-current assets. There is a chang

Case e to the way in which the interest is recognized and presented

and therefore there is a further change in accounting policy

The change in the method of depreciation is a change in acco

unting estimate. However, there has also been a change in th
e way in which depreciation is presented in financial statemen
ts and this is a change in accounting policy
 Case
Gear currently recognises revenue on contra
cts in proportion to the progression and acti
vity on the contract. The normal accounting pr
actice within the industrial sector is to recog
nise revenue when the product is shipped to
customers. The effect of any Change in accou
nting policy to bring the company in line with
accounting practice in the industrial sector
would be to increase revenue for the year by $5
00,000.
Analysis : IAS 11 & IAS 18
The company’s current policy of recognising revenue a
s the contract progresses is acceptable under IAS 11
Construction Contracts and IAS 18 Revenue. Howeve
r, IASs 11 and 18 may not specifically apply to this si
tuation.
IAS 8 states that where there is no specifically applicati
on standard, management should select a policy that r
esults in information that is relevant to the need of user
s and reliable.
Management should refers to standards dealing with si
milar issues and to the IASB framework, but it may als
o consider accepted industry practice (revenue is reco
gnised when the product is shipped to customers).
The advantage of adopting this policy is that revenue
would increase and this is particularly important given t
hat significant provisions may have to be recognised (s
ee below). Provide that there is no conflict between the
industry practice IASs 11 and 18 the company should c
hange to the new policy. Again, the accounting and disl
osure requirements of IAS 8 apply)
Analysis Case (IAS 37)

IAS 37 provisions, contingent liabilities and contingent assets states that a pr

ovision should only be recognised if:
1. There is a present obligation as a result of past event, and
2. It is probable (more likely than not) that an outflow of resources embodyin
g economic benefits will be required to settle the obligation, and
3. A reliable estimate can be made of the amount of the obligation
Analysis Case (IAS 1)
IAS 1 Presentation of Financial Statement states that an entity sh
ould prepare its financial statement on a going concern basis.
This assumes that management intends to continue trading for at leas
t 12 months from the reporting date and that there will be no need to c
ease operations or to liquidate the entity during the period. IAS 1 also
state that management should access the entity’s ability to contin
ue as going concern and should disclose any uncertainties that ca
st significant doubt on this ability.

Therefore it may be necessary to disclose the fact that there are con
cerns about viability of the business, should the worst outcome of t
he plagiarism case occur.
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